Sir Mervyn defends George Osborne’s QE trick

Sir Mervyn King was pressed today on his role in the decision to transfer £37bn from the quantitative easing programme to the Treasury. Picture: Getty

Sir Mervyn King told MPs, slightly wearily, at the end of today’s Treasury Select Committee hearing, that this was his 100th appearance before a parliamentary committee since he joined the Bank of England. It was as rigorous a session as any of the 99 others that the Governor has sat through in his time, with the committee members choosing in particular to attack the decision to transfer £37 billion from debt interest in the Asset Purchase Facility from the Bank’s QE budget back to the Treasury.

As Jonathan blogged on Monday, the Institute for Fiscal Studies warned George Osborne against using that transfer to meet his debt target, and MPs were unimpressed, not just with the substance of the decision, but also the way in which it was announced. They even elicited a rare apology from the Governor for this. He said: ‘I accept it is a matter of regret these announcements were not made at the same time.’ He added that he was unsurprised by the outrage from some commentators, Coffee House included, saying: ‘I think any move of this kind is likely to attract a good deal of cynical comment from our press.’

But King did make clear to the committee that he disagreed that this move would allow the Chancellor to ‘cook the books’, saying:

‘This does not give anyone the option: it is merely taking cash one year with the clear commitment to repay it in the next… it doesn’t have any impact on the long-term fiscal position.’

He took great exception to Andrea Leadsom’s claim that the way the Bank had handled the decision on the QE switch was ‘highlighting really that the Monetary Policy Committee is operating really in a complete silo’. Leadsom drew parallels with the way the Bank had handled the Libor crisis by passing concerns on to others to investigate. But Sir Mervyn thought this ‘irrelevant’.

George Mudie pressed him on whether he had warned George Osborne about the long-term effects of the switch, asking:

‘Did you warn the Chancellor… by raiding this money he’s actually not being very clever or fair to your successor?’

The Governor replied:

‘I certainly discussed with him the consequences that taking the car now from the Bank to the Treasury would have… the question that you raise about could interest rates be higher in the future… is an important question, but it is very clearly one for the Treasury.’

One question that really was all for the Bank was how it managed its growth forecasts. Sir Mervyn didn’t exactly apologise for not cutting growth forecasts sooner, but he did admit that this should have happened, saying the change was ‘something which I think had been building up in our minds’, adding: ‘I think we should have done it much earlier, but we didn’t.’

He’s clearly keen to move on from his current role, updating the committee on the number of months and days that he has left at the Bank. Committee chair Andrew Tyrie even joked that King had glanced at his watch as he told them how long he had left, as though he might be trying to work out how many minutes and hours there were, too. The members of the committee, meanwhile, might be counting down the days to the session they will hold with King’s successor, Mark Carney, to see what he thinks of Osborne’s clever QE switch, and the general legacy he finds waiting for him when he arrives at the Bank.

I’ve had two pieces removed from this site within hours. The latter sought — in very polite, measured language — an explanation, in public, on this blog, for the removal of the former which related to a link that was extremely well-lawyered, concerning expenses claimed by Osborne.

(The former was presented in equally polite, measured language).

As I said, this is in the public interest. The integrity of The Spectator is in question.

You appear to endorse censorship. Why?

HellforLeather

Why do you refuse to explain why you remove comment, especially when asked to?

Why do you lot stifle debate, aired in the public interest, rather than promote it?

As I said in one of the pieces you removed, that information on Osborne tricks is all in the public domain. It was just neatly pulled together by someone who you apparently fear could further expose crass behaviour involving taxpayers’ money.

Please explain your agenda here.

Cameron and Osborne have publicly pledged to promote transparency involving public sector bodies and the affairs of politicians. I would assume The Spectator backs that?

In which case, you should provide a well-argued response, in public on this blog, to my comments removed from your site. They were polite, measured.

My comments, and the link they referred to, were legally sound. They should have been allowed to stand, for others to either rip apart or endorse.

itdoesntaddup

It’s
quite clear that any profits from the QE gilts are the property of the
Treasury and taxpayers – and so are any losses. Those are the terms of
the guarantee given by the Treasury to the BoE.

So, what are the profits? Last time I did the full calculation a
week ago, the mark to market value of the gilts was £398bn, compared
with cost of £375bn – a capital gain of £23bn. In addition, there is
the coupon income that has been parked at a current account at the BoE
earning no significant interest, which we are told will shortly amount
to £35bn after deducting the 0.5% interest charged by the BoE on its
£375bn loan to the fund.

So far these profits have been treated as part of the financial
deficit including financial interventions (which no-one seems to bother
to check, gaily accepting that the deficit excluding financial
interventions is what counts without thinking about it). That is, they
are lumped along with the funding provided to the state banks. Those of
us who have actually looked at the numbers over time in Table PSF11b of
the monthly ONS public sector finances bulletin may have thought that
banks were repaying loans from the BoE under the Credit Guarantee Scheme
and Special Liquidity Scheme etc. by some £58bn more than they have
been: the total profit on a mark to market basis from QE. That’s the
first element of the bad news.

The second element is that the modified duration of the QE portfolio
implies a yield sensitivity of about £30bn for a 1% increase in yields -
i.e. this is the amount that the value of portfolio would fall if
yields rose by 1% across the board. In addition, the Treasury has
exposure to rising yields on the gross amount of borrowing it does: the
deficit, plus redemptions of gilts to be refinanced (some £166bn this
year according to the current DMO remit – so assuming similar
maturities, an exposure of another 30×166/375, or around £13bn). If the
Treasury wishes to take a large chunk of the profits and spend them
now, then it is exposing itself to having to finance losses that could
arise very rapidly e.g. if UK debt suffers a downgrade, instead of
having money in the BoE savings account rainy day fund to tide them
over.

The third element is that held to redemption the gilts are only worth
£326bn, so there will be a capital loss to be funded of nearly £50bn
over time. The first small chunk is about £0.5bn which will be realised
when the 2013 4.5% gilt is redeemed next March. At present, the QE
portfolio generates £14.5bn in income p.a. (which will decline as more
gilts mature, assuming no further QE purchases). At least it only takes
about 4 years’ coupon income to cover these losses.

HellforLeather

I suspect Osborne has more such tricks up his sleeve, and indeed took this into account when pursuing Carney to boss the BOE.

Zerohedge, commenting on Carney’s appointment yesterday, raised the prospect of what it called “turbo-mega QE in the UK”.

It quoted from the statement that Goldman Sachs released in response
to the appointment of its former employee and protege Carney as BoE governor, in
which Goldman says:

“Relative to the conservative approach towards credit easing that
the BoE has adopted under Governor King’s stewardship, it is …
possible that Governor Carney may be prepared to engage in more
‘unconventional’ forms of QE.”

Daniel Maris

Well good, if by unconventional they mean for instance one off “gift tokens” or actually using QE to build homes.

TomTom

Where is Mervyn King going after Threadneedle Street. The White House has a nice little sinecure for favoured advisers in posts at Harvard University or Kennedy School, it is quite fascinating how it works. No doubt King will have a lecture circuit reward for his work as Bernanke’s Junior…it would be fascinating to know of his future plans which no doubt will have an unrevised growth trajectory in terms of income

http://www.facebook.com/john.maloney.39904 John Maloney

The economy of this country is in a dire state. If it were not for the fact that the Government is keeping interest rates low by buying up around half of the Government bonds on offer, then interest rates would spiral and homeowners and other debtors would be bankrupted.
This ploy is likely to add £700 billion to our overall debt.

telemachus

Osborne turned off growth hence taxes and hence the burgeoning deficit
The major concern of QE is the driving down of annuities and hence pensionners income(at least those not given the 50% tax break by Osborne)

Archimedes

Sorry, but aren’t you in favour of looser fiscal policy? Where do you think that the money for that would come from? More QE, maybe? Let’s not pretend that you give a shit about pensioners.

TomTom

We don’t have loose fiscal policy – we have loose MONETARY POLICY because we have a Sclerotic Fiscal Policy

telemachus

We all forget China

TomTom

Brown started QE

TomTom

They estimate QE has cut $330 billion of Spending Power out of the US economy

HooksLaw

The IMF point to the world going into recession.

Hardman makes no mention of what else to do with the money that seems to be sitting around. Despite the pejorative words from her, King says, ‘ it doesn’t have any impact on the long-term fiscal position’

Sadly all we seem to get from this Committee is the same grandstanding from its members as all the others.

How to get on in life: admit you were completely wrong without actually offering to do anything about it.

Jim

The danger of this kind of game is that everybody who has real goods starts rejecting government paper, then we have a really big problem called economic collapse.

TomTom

Then they will be expropriated – it has always worked that way……if you have real assets and won’t take paper from the Protection Racketeers you will lose your property and/or your life

HooksLaw

Tell Obama. This is what the USA and Japan do. If the deficit is less then we pay less on interest payments. The WSJ says there will be a saving of 1 billion a year.

TomTom

Incoherent rubbish. What the hell are you trying to say ? Obama is irrelevant anyway – bernanke runs the Economy not the jackass in the White House

anyfool

Is this all a supposed top committee of MPs can think of, who cares when the Chancellor puts back in to the Treasury any amount of funny money, its not real, it will not make any difference in the long run, it will not fool most voters, it might fool the mentally deficient midgets who vote for the something for nothing Labour Party.

What it should not do is fool people who are supposed to hold the worthless creatures who now govern this country to account,

Derk Aderkaderk

In the long run interest rates must go up,this continued inflation and creditbased growth is killing industry and private initiative. Just try to put some money on the bank,save and see where that gets you,you can do it for then years without barely gaining anything from the interest after inflation sets in,politicians cant find this to be a healthy system?

Yes dimwit. Pricing of DCF is destroyed by manipulated interest rates and Cash Balances sit idle. Do learn some Economics rather than continuously showing yourself as a GCSE halfwit looking at coloured pictures in some moronic textbook

Chris Morriss

You are quite right about interest rates. I’m afraid that all Captain Hook knows is that the extension of a spring is linearly proportional to the load on it.

http://www.coffeehousewall.co.uk/ Coffeehousewall

Just a bit off topic. Frank P, late of this parish, has penned an excellent post about the case of SAS Sergeant Danny Nightingale, which seems to be slipping into undeserved obscurity here.

Also off Piste ( but let’s face it, this is a bloody boring post) but if anyone here has any doubts that Lord Patten is the biggest arse in Britain ( and I’m sure no-one does) they should check out his clash with Philip Davies over at the Telegraph. PD really got under the fat slug’s wrinkled handbag skin skin : fabulous viewing.

anyfool

I watched that man aka Fat Pang he has to be the most slippery character since Blair, the same ingratiating slyness that just slithers out of his mouth, that he does this without seeming to try is a testament to the superior disdain in which he holds all other lesser mortals.
You could not show this man a rats nest.

telemachus

He solved Hong Kong and is solving the BBC

anyfool

Whatever he did in Hong Kong it certainly solved nothing, no democracy and a financial center of world renown, that is exactly what it was when he arrived it was the same when he left, the BBC is less trusted since he arrived.

dalai guevara

Well, at least he did not list all the university firsts he ended up receiving…

MirthaTidville

Apparantly the odious creep Bradshaw has tweeted that he thinks `Fat Pang` is a class act!!..that tells you all you need to know….

telemachus

Folks
I would be a bit careful before clicking on this link
First you need a credit card for paypal donations
Second if you are of a delicate disposition

dalai guevara

Printing without any form of securitisation is the beginning of the end. Triple A rate my backside.